28/02/2020

This article was first published in The Australian on the 28th February 2020. 

The start of this decade presents a really strange and challenging time in Australian corporate governance.  The outworkings of the Royal Commission are only just getting rolling but they’re already massive.  Regulation is expanding, public and private enforcement is fierce, compliance is the focus for big companies and yet trust in business continues to fall. 

The Reserve Bank and the Productivity Commission are saying Australia needs entrepreneurship to maintain living standards but business leaders see things on the ground going in the other direction.  Craig Drummond from Medibank said recently that

“the economy is slow, regulation has tightened and as a result risk appetite among executives and boards has diminished. These issues are unquestionably constraining new investment.”

The takeaway from the Royal Commission would have to be the need to align the outcomes of business with community standards and to have corporations that see purpose beyond profiteering alone.  This system won’t be created by compliance managers or greater fines.  No-one has thought harder than Ken Hayne about how to change corporate conduct but he did not recommend heavier penalties.  And yet penalties went up. 

There are always ebbs and flows in regulation. Some will see this as a reset period and will believe that the pendulum will eventually swing back to greater balance.  But when do fines ever get reduced or rules repealed? The pendulum is now just a ball without the stick bit and it is rolling down a very steep hill. Making the strides that everyone wants will require different ideas, not more rules.  The Noel Hutley opinion on climate risk changed the way the entire Australian business/regulatory eco-system sees environmental obligations.  The law didn’t change but attitudes did, and that was before the terrifying summer we’re having. 

Meaningful change would be better served by looking for changes in perspective. Despite the massive ramping up of laws and fines last year, the greatest unrest was over the proposal to add a non-binding ASX governance recommendation for companies to act with their social licence in mind.  One of the great ironies of the current muddle is that the main stated benefit of shareholder primacy was its simplicity – but the enragement of community and legislators has complicated business profoundly.  A perspective shift to achieve the post-Commission goals for both business and society might look at all that in a different way.  Something like a compact or a START Treaty for business and society, with a deal along these lines:

We (big business) will prove that we are genuinely purpose led and will be more open to scrutiny on this front.  The trade-off is a de-escalation in prescriptive compliance-based rules and enforcement (public and private) that can punish companies and individuals for honest failings and inadvertently harm employees, customers and the economy.

If legislators were convinced that business was run for broader purpose they might be more comfortable dialling back regulation to old-fashioned ideas that a director’s role is about basic duties of care, stewardship and hiring and firing the CEO, that shareholder redress should be selling out or ganging up to sack the board.  If business was seen by the community as run for more than short term shareholder gain, the idea of regulators setting executive pay or sitting in board meetings would be as ridiculous as it would have seemed 5 years ago.  The right penalty for missing good faith earnings guidance would be market-based (i.e. the power to sell), not a hyper-punitive regulatory/class action maelstrom that doesn’t much benefit anyone except lawyers and litigation funds.  

Over the next 5 years Australian companies will spend a fortune on compliance while taking less risk.  Control and management of non-financial risk will improve to best-practice international standards and there will be fewer of the scandalous breaches of law that have come to light over the last few years.  That’s a good thing but not a complete answer to what society wanted to see out of the Commission.  Compliance with esoteric and intrusive laws won’t drive purpose and no-one can fix society’s problems (global warming, inequality, slowing employment) without good and successful businesses.

Back in 2012 a UK Charity called Blueprint for Better Business started after corporate leaders approached the Archbishop of Westminster for help in fixing the breakdown of trust between business and society.  Their fear was that unless business responded to shifting societal expectations, there was a risk of

“over-regulation creating a compliance mentality, stifling innovation and pushing business and society still further apart, with both losing out as a result”.

That’s where we’ve arrived in Australia. 

Big business has had the shock of its life over the last two years.  The idea of purpose, stewardship and a focus on culture are back big time.  It provides an opportunity for a broader reset to benefit everybody that might be missed if the response is only more and heavier sticks. 

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